Evaluating Startup Ideas

“Even if you don’t have the perfect idea to begin with, you can likely adapt.”
~ Victoria Ransom, co-founder of Wildfire Interactive

Evaluating Startup Ideas

Iowa State University students who take my entrepreneurship course create two or three concepts for new businesses in the first half of the semester. It’s now my thirteenth semester teaching the course, and I’ve continued to evolve the course to help students create stronger new business concepts. The beginning idea for a startup business is only part of what’s necessary to get to a viable business, but it certainly helps to start with a quality idea.

A tool I’ve developed to help students evaluate their own and other student startup ideas is the Startup Evaluation Matrix. It also serves as the rubric by which I formally evaluate and grade new startup business concept papers. In addition, I increasingly use it when speaking to aspiring entrepreneurs from outside the course who are looking for feedback on their ideas.

Each of the elements of the Startup Evaluation Matrix reflects a yin and yang relationship; complementary, interconnected, and interdependent forces that shape its attractiveness. This balance in a startup business idea is difficult to shape, yet one that consistently comes through in the most attractive startup concepts.

Migraine Problem/Value to Customer – I use Diana Kander’s all in startup book to start the class, and have adopted her notion of a problem that represents a significant opportunity, a migraine problem. A business needs to solve a problem so significant that customers will do whatever it takes to solve it, including paying someone else for a solution. Envision the problem as a migraine headache. The flip side of the problem is the value of the solution to the customer. Does the solution have a clear and significant advantage? Does it hit the ‘homerun’ of being better, faster, and cheaper? Does the solution deliver value while making life simpler for customers? So many technology startups miss this mark in that they may be able to solve a problem, but they are so complex or require such significant changes in behavior that they simply will never be considered viable by most prospective customers.

Niche Now/Big Market Potential – Peter Thiel in Zero to One writes that entrepreneurs need to look for ‘monopoly’ opportunities; markets where they can shield their businesses through various means from competition that will bid their profits to zero. I think of attractive market opportunities for startups as being markets that are niches currently, but with the potential of big growth. When we started E-Markets in 1996, there was not really a market for Internet-based electronic applications in the agribusiness space. However, the Internet was new as a platform, and clearly had significant growth potential as a better, faster, cheaper platform for e-business. Today I see agricultural entrepreneurs working on indoor aquaculture, robotics, diagnostic software, and other areas that have an undefinable market opportunity today, but huge potential in tomorrow’s market.

Doable Now/Unique Solution Long Term – Rarely is their something completely new, whether a technology, production system, product, service, or method. Rather, entrepreneurs combine old things in new ways, and new places to create new solutions to new audiences. Quality startup ideas balance the do-ability of a new solution near-term with its long-term uniqueness. A startup that will truly scale can’t be a copycat, it must aim to solutions that are unique and represent the target for which copycats aim.

Contrarian/Surprise Element – An attractive startup idea has some element that is contrarian. It is treading left while everything else is treading right. Perhaps that arises from the independent-minded nature of entrepreneurs who chart their own course. I have an exercise for aspiring entrepreneurs where I ask them to find and unleash their inner contrarian, for its often from this character within us that we find the most interesting ideas and the perseverance to see them through. The contrarian nature of interesting new business ideas also lends an degree of surprise or unexpectedness. The highest impact startups will be something that could not be predicted by most people. The innovations that disrupt an established market will be initially dismissed by businesses that will eventually be put out of business. In 1996, I was involved in a consulting project for Kodak. The Senior VP we worked with dismissed the strategic threat of digital cameras. Kodak was the first company to market a digital camera in the 1990s, but ignored the opportunity enough that its business was knocked from beneath it and filed for bankruptcy in 2012.

Deciding the quality of a startup business idea is more art than science. Malcolm Gladwell’s Blink explains that choices that seem to be made in an instant-in the blink of an eye-actually aren’t as simple as they seem. I know great investors and entrepreneurs that very quickly assess a startup idea, a business plan, or the viability of a new product or service. I suspect that they have some kind of internal matrix-like structure that enables them to make snap judgements that are most often on-target. Their mental matrix has been developed based on experience, but I’ve found that the Startup Evaluation Matrix is a means to embed a beginning way of thinking for less experienced entrepreneurs too.